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Enhancing balanced portfolios with cppi methodologies – insights from a simulation exercise

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  • Rossi, Francesco

Abstract

We investigate if using a CPPI-style methodology it is possible to “improve” the distribution of portfolio returns from the point of view of an investor holding a balanced portfolio with different allocations in Equities, and whose concern is to avoid significant negative returns and in general to maximize the skew of the returns distribution, with a yearly horizon. The starting point of the analysis is a traditional balanced portfolio investing in a constant mix of asset classes. The utility preference structure that underlies the analysis is that of an investor that is particularly adverse to large negative returns, and is willing to sacrifice (average) expected returns to reduce the severity of expected losses. This is very similar to a “safety first” approach. Hence, we will primarily be concerned with negative Skew, drawdown, volatility as negative properties of the analyzed portfolio strategies that we are seeking to minimize

Suggested Citation

  • Rossi, Francesco, 2008. "Enhancing balanced portfolios with cppi methodologies – insights from a simulation exercise," MPRA Paper 40183, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40183
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    File URL: https://mpra.ub.uni-muenchen.de/40183/1/MPRA_paper_40183.pdf
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    References listed on IDEAS

    as
    1. Black, Fischer & Perold, AndreF., 1992. "Theory of constant proportion portfolio insurance," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 403-426.
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    More about this item

    Keywords

    CPPI; portfolio management; drawdown; balanced portfolios; skew;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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